Mon January 30, 2012

As Homeowners Struggle, Freddie Mac Benefits

A report by NPR and ProPublica finds that Freddie Mac bet billions of dollars against homeowners' ability to refinance their mortgages. Public documents show Freddie Mac sought to make gains through complex securities which would make money for Freddie Mac, but homeowners with high-interest rate loans would not be able to qualify for refinancing. This is not illegal, but it does raise questions about a conflict of interest within a federally-owned company that is supposed to make getting a mortgage easier.

Chris Arnold is a correspondent here at NPR. He worked with ProPublica on the investigation of Freddie Mac, which came out this morning. He's with us here in Studio 3A. Nice to have you in Washington.

CHRIS ARNOLD, BYLINE: Thank you, Neal.

CONAN: Also here in the studio is NPR senior business editor Marilyn Geewax. And, Marilyn, good to have you back on the program.

MARILYN GEEWAX, BYLINE: Hi, Neal.

CONAN: And, Chris, let's start with you. So how does a large taxpayer-owned company get involved in betting against refinanced mortgages, which everybody says would be great not only for the mortgage holders but for the economy?

ARNOLD: Right. Well, I can see how you would think that. Part of what you need to understand to understand the story is that Freddie Mac and Fannie Mae are kind of two companies inside of themselves. So take Freddie Mac, it does a guarantee business, which most people know them for, you know, you get a home loan, they guarantee the loan, they allow the mortgage market to work well that way. That was sort of what their mission was built around, you know, going back decades, that they help foster homeownership.

But at the same time, they also have what could be described as a hedge fund inside of the same company, and they make all kinds of investments. So it's within that sort of hedge fund side of the business that we found this was going on. And I was working on this with ProPublica and a reporter there, Jesse Eisinger, who we should mention, too.

CONAN: Of course. So the way this works is that hedge fund part was betting against homeowners refinancing. In other words, if you're paying 7 or 8 percent on your mortgage, they are betting that you will not be able to refinance, therefore you will be paying a lot more on your mortgage payments every month. While it might be in everybody else's interest that the mortgage rate come down to what it is, three and a half, 4 percent.

ARNOLD: Right. And one way to think about this is let's say you're going to buy a house, Neal, and you want to borrow $100,000. So Marilyn and I...

CONAN: Cheap house.

ARNOLD: Well, yeah, in D.C., imagine...

(SOUNDBITE OF LAUGHTER)

ARNOLD: ...this is in another part of the country. So, you know, it's public radio. We have to do what we can do.

(SOUNDBITE OF LAUGHTER)

ARNOLD: But - so Marilyn and I loaned you the $100,000, and you're paying 7 percent interest. And then, you decide, well, jeez, look, I can get three and a half percent or three and seven-eighths. I'm going to refinance. And that's a little sad for Marilyn and I because we don't get the 7 percent interest payment anymore, but we do get our $100,000 back, right? When you refinance, you pay off...

CONAN: I refinance with the ABC Mortgage Company, and they pay you the $100,000?

ARNOLD: Exactly. Right. So that is very different than what Freddie Mac has done with these investments. Because what Freddie Mac did is they owned these mortgages, but they sold off their right to collect that principal. And all they have the right to do now in these trades is to collect that 7 percent interest. Does that make sense?

CONAN: Well, I guess, it makes sense for Freddie Mac, and that 7 percent that they're collecting, that's why they want to make this short-term bet that a lot of people will not be able to refinance - President Obama spoke about last week.

ARNOLD: Right, right. And the thing is since they have given up the right to collect the principal, that's all they have, right? So if you stop paying the 7 percent and I'm Freddie Mac, I lose everything. I mean, I don't get any money from you. I don't get the $100,000 back. And so it's a more concentrated way to invest in the mortgage market and it - bond traders say the only reason you would do that is if you were betting against homeowners being able to refinance.

GEEWAX: And, Neal, could I just make a point here?

CONAN: Marilyn Geewax, go ahead.

GEEWAX: Yes. The thing that is unusual about this is Wall Street is full of hedge funds and big investors, and some of them go broke, and some of them make tons of money. But wait a minute, Freddie Mac is owned by the taxpayers these days. So it is...

CONAN: Didn't those taxpayers just bail it out a couple of years ago?

GEEWAX: Yeah. So in 2008, when there was the financial crisis, it's a long story, but fundamentally, the taxpayers now own Freddie Mac. So one might wonder why taxpayers are involved in acting like a hedge fund. Now, it may be in Freddie Mac's best financial interest to make all sorts of investments that could be very profitable for them, but there may be some questions here about: Should Freddie Mac be involved in these kinds of things when they have to take very risky positions like that? Is that a role for a taxpayer-owned entity that has the mission of helping homeowners?

CONAN: We're talking with Marilyn Geewax, who's an editor here at NPR, and Chris Arnold, NPR correspondent. If you've tried to refinance lately and you've had troubles, give us a call. 800-989-8255. Email: talk@npr.org. And, Marilyn, that raises another question. Freddie Mac's role is to facilitate good mortgages. If it's betting on the short term that people would not be able to refinance, is it blocking people's ability to refinance?

ARNOLD: Well, and this is something, you know, we want to be careful got to overstate here. And what Freddie Mac says is there is a firewall between the investment part of its business and the part of its business that sets policy for homeowners and for refinancing, some things like that. So they say whatever might be going on on those two businesses, it's a coincidence of - you know, whatever, that it's not a concerted, calculated effort to profit by, you know, doing wrong by homeowners. But even at best, what our reporting has shown is that they're making a calculated bet against homeowners being able to refinance, and that - you know, is that an appropriate bet for a company that can control homeowners' ability to refinance to be making?

CONAN: Is it, Marilyn, a legal bet? There seems to be a conflict of interest.

GEEWAX: And there are people in Congress now who are starting to wonder about whether or not this should be changed, at the moment, as the laws are structured, and as Freddie Mac's mission is, which is to not go broke. You know, it's supposed to be a solvent organization doing its business, but it's also supposed to be helping homeowners. This structure could be called into question.

And one senator, for example today, Senator Bob Casey, a Democrat from Pennsylvania, sent a letter to the president urging him - I'm quoting from the letter - he says, "to put an end to these practices immediately, to ensure that the investment decisions being made by Freddie Mac are in line with the intent of Congress and the greater needs of our economy." So we also spoke today with Senator Johnny Isakson, a Republican from Georgia, who's also interested in reforming Freddie Mac and Fannie Mae. So I think there are people on Capitol Hill who are starting to really ponder: What is the structure of these organizations and what role do they play? What's appropriate for them to do? And this is just sort of an interesting look at conflicts of interest. We are not, in any way - our story has not said that it is illegal, just that it raises questions about how it functions.

CONAN: Well, you did quote Alan Boyce in your story, a former bond trader who's been involved in efforts to push for more refinancing of home loans. Freddie Mac, he said, prevented households from being able to take advantage of today's mortgage rates and then bet on it. You say, well, Freddie Mac has two arms, one, the left hand, did not necessarily know what the right hand is doing. However, they seemed to be miraculously working in concert.

(SOUNDBITE OF LAUGHTER)

ARNOLD: Well, and the timing of some of these, too, you know, lending would be - or credit would be tightened. One example was Thanksgiving evening or somewhere around there, and then very soon after that, some trades were made that were betting against homeowners. So, you know, but again, we can't prove that the left and the right arms were working together. What is being referenced in that quote, as well, is that Freddie Mac has been making it harder for homeowners to refinance. They've been putting additional fees in place, additional restrictions. Some of that is justified.

The whole lending community has been making things tighter since the housing market collapsed, but more and more economists, you know, are saying, look, the pendulum's probably swung too far. We should - especially when it comes to refinancing. We've got hundreds of - we got tens of millions of homeowners who are stuck in higher-interest-rate loans. Wouldn't it be good for them, wouldn't it be good for the economy if they had some more money in their pocket to spend? You know, let's let some more of those people refinance.

GEEWAX: Neal, if I could just make one point. The important thing here, in all of this discussion of these big terms - hedge funds and Freddie Mac and some of these unfamiliar things - the issue here is the housing crisis. That's something we all know a lot about. It's affected everyone in this country, and particularly in states like Florida, California, Arizona, Nevada. These states have been hit hard because of this housing crisis. Many people have homes that are underwater. They want to refinance. The economy has really been slowed by the housing crisis. So all of this is not just a strange academic discussion about what is the role of a government-sponsored blah, blah, blah, you know.

CONAN: Quasi-governmental corporation, yeah.

GEEWAX: It's about: Can we end this housing crisis? How do we get to the end of what has been a nightmare for the country? And would - is Freddie Mac part of the solution, or is it sort of part of the problem right now because of its structure? And I think we've seen in the Florida primary the topic of Freddie Mac last week, listening to the debates, how many times that name came up. It's been a big issue, because when you're talking Florida, you're talking housing. People care about this topic, and it's not some esoteric, weird discussion among academics and investment bankers. It's something that touches millions of people's lives.

CONAN: Let's get a caller in on the conversation. Let's start with Jeff, Jeff with us from Pleasant Hill in California.

JEFF: Good afternoon. First time caller, many years listener. And this is a subject that I am - I'm almost speechless that I'm able to talk to you about this today because I've been following this for many, many months. My spouse and I purchased a home here in the Bay Area in 2008. It dropped 40 percent in value in the last three-and-a-half years. We both are employed. We have excellent credit. We've been trying to refinance, but basically, they're asking us - and our current mortgage holder - is to re-buy our house a second time, to come up with up to 75 and up to $80,000 to make up for the lost equity. I've been following this program last summer. I've been contacting my mortgage company weekly. Finally, two weeks ago, my mortgage company said that the rules are finally in place, and we might be able, might be able to refinance at the current rate starting after February 6th.

The issue is Freddie Mac keeps changing the rules. There isn't any teeth into the programs. There's no penalty involved for people like us who cannot refinance because, if we have to get an appraisal, our house is worth less than what we paid for it three years ago.

ARNOLD: Yeah. This gets to the heart of one of the big issues that this story raises. And, you know, there have been some baby step - I guess you might call it - efforts to allow underwater borrowers and other borrowers to get these lower rates - if, as the caller says, you know, they have good credit, they've got jobs, they can pay. It's just here they are stuck, you know, in a higher interest rate.

President Obama has talked about this. Lots of economists have talked about this. There's a program called HARP. I believe it's the Home Affordable Refinancing Program.

CONAN: Refinancing program, yes.

ARNOLD: So, you know, the idea is here we could help millions of people. So far, I think just about a million people have been helped through that program, but there are 10 or 20 million other people out there who haven't been able to access it. And so the question implicitly of the story is, well, you know, it certainly can't help that there are conflicts of interests within these companies that are at the heart of allowing these people - you know, if Freddie Mac is making bets against homeowners like this, you know, is that helping things?

CONAN: Jeff, how much difference would it make to you if you were able to refinance at, say, three and three quarters? I think Jeff has left us, so we thank him for his call.

GEEWAX: Well, this is really the heart of the issue, too, Neal, that what we're talking about when we say there's refinancing. If you think, hey, I'm renter. I don't care. What's it to me? It matters to the economy for this reason: right now, we have a lack of demand. Consumers haven't been spending enough money, and that hurts people at restaurants. It hurts retailers. It hurts car dealers. People need more money in their pockets, and this is one way that you could actually boost people's incomes. Now, perhaps they'll use that money.

Let's say you save $500 a month. Maybe all you're going to do is pay down your dentist bill and your credit card. Maybe that doesn't stimulate the economy tomorrow morning, but it does help that dentist's office get the bill paid. And it does start to free up room on your credit card so that by summer, maybe you can take a vacation. Really, to heal the economy, it has to start with this housing problem.

CONAN: NPR senior business editor Marilyn Geewax, also with us NPR correspondent Chris Arnold. You're listening to TALK OF THE NATION, from NPR News.

And a similar email from Allen, who emails: My wife and I have credit scores that our mortgage broker has termed beyond excellent. Still having trouble getting a mortgage because of retail lenders' concern over their ability to resell our mortgage to Fannie or Freddie. So even if you're talking to the bank down the street, Chris Arnold, you're also talking to Fannie and Freddie.

ARNOLD: You know, Fannie and Freddie, they're kind of the great eyes behind the curtain. You know, I mean, you don't see them. You might interface with somebody else. But, yes, they control, essentially, the entire mortgage market right now. You know, in the wake of the housing debacle, everything is going to Fannie and Freddie (unintelligible).

CONAN: I got a lot of emails and calls along these lines. From Ricky: What's the role of Dodd-Frank? And this - that, of course, the financial reform package that was passed in the previous Congress. Does this not stop it?

ARNOLD: Well, there's a lot we could talk about there and probably don't want to get into. But one thing is, lenders will say that Dodd-Frank makes it harder for them to refinance people. So they say this new regulation is making things tougher, you know, but we could have a whole show on the merits of that claim, probably.

CONAN: Let's see if we can get another caller in. Let's go to Richard, and Richard with us from Wichita.

RICHARD: Yes. Real quick question. It was commented that Freddie Mac sold off the rights to collect the principal in the home loans, and I would like to know who bought those rights and what percentage of the principal they paid for the right to collect on those - on the principal.

CONAN: Any idea, Chris?

ARNOLD: Those are all good questions. The takeaway in all of that is that the - those rights were sold off into the market, so investors all over the world potentially could have bought them. Critics of these deals also say that, look, if Freddie Mac had just gone out and sold these mortgages in a simple fashion, it would have gotten more money for them than it got by cutting them up into 20 pieces and selling them the way that it did.

CONAN: But this quick question is: investors?

ARNOLD: Investors.

CONAN: Investors bought these. Richard, sorry if we can't be more precise than that...

(SOUNDBITE OF LAUGHTER)

CONAN: ...but that's kind of the way these commodities work. We thank you for the call. And more on this story later today on ALL THINGS CONSIDERED. Chris Arnold, thanks very much for your time.

ARNOLD: Thanks, Neal.

CONAN: NPR's Chris Arnold worked with ProPublica on the investigation of Freddie Mac's bet against homeowners. Also with us, NPR senior business editor Marilyn Geewax, both here in Studio3A. Tomorrow, a provocative proposal: Instead just reading and listening to people who agree with you, why not seek out the other side in political commentary? Join us for that. It's the TALK OF THE NATION, from NPR News. I'm Neal Conan, in Washington. Transcript provided by NPR, Copyright NPR.